Arizona gas prices are up, and there's no end in sight

Prices not hurting economy yet, but experts concerned

by Ryan Randazzo - Mar. 8, 2011 12:00 AMThe Arizona Republic

Gas prices nearing $3.50 a gallon across Arizona are setting records for this time of year, and economists say the price surge is approaching a tipping point that could spook consumers into cutting back on spending.

After remaining steady around $2.76 a gallon in Arizona for most of 2010, prices began to rise in December and have shot up since then, passing $3 a gallon in January and continuing to increase.

The last time fuel prices saw such a run-up was in 2008, when they eventually set records at more than $4 a gallon, and the high price of oil helped plunge the global economy into a recession.

The nationwide average Monday of $3.51 a gallon, according to AAA, threatens to stall the already slow recovery by cutting into consumer spending, which represents 70 percent of economic activity.

Kylie Freeland, 22, of Avondale already has stopped driving across the Valley on Saturday nights for car shows, and is keeping her turbo Dodge SRT-4 mostly parked these days because it runs on premium fuel.

"I've definitely cut back on what I spend on food, and we used to just drive out to Mesa for fun," Freeland said. "I guess I just won't be driving as much."

Prices are spiking as civil unrest in Libya has put a premium on oil, even though the North African country's troubles have disrupted less than 2 percent of global crude supplies and Saudi Arabia has increased production to make up the gap.

The upheaval in the Middle East and strong global demand have pushed oil prices over $100 a barrel for only the second time in history.

The average price for gas in Phoenix was $3.43 per gallon Monday, according to AAA. That is lower than the national average, but is 73 cents higher than a year ago.

And prices already are higher than they were in March 2008, when they were on their way to record highs that summer.

After reaching a record $4.09 in July 2008, Arizona's average fell, and was less than $2 in March 2009, and less than $3 in March 2010.

The increase in Phoenix means it costs people almost $12 more to fill a 16-gallon tank today than it did last year.

Metro Phoenix residents buy about 4.7 million gallons of fuel per day, according to the Arizona Department of Weights and Measures. So the 73-cent increase means that every day, people in the area spend about $3.43 million more on fuel than they did a year ago.

"The prices are a threat and something we are concerned about," said Chris Lafakis, an economist with Moody's Analytics in Philadelphia. "Every single penny increase has an effect on consumers."

Lafakis said the recent 50-cent increase in the per-gallon price will drain about $60 billion from consumers' pockets if prices stay that high for a year.

"That is about half the $120 billion payroll tax reduction compromise (Congress passed) in December," he said. "Instead of us having an additional $120 billion in stimulus from lower taxes, maybe half of that gets eaten out by higher gasoline prices."

Lafakis said he is not worried about the recovery at current prices, but further steep increases could cause real problems.

"The economy can handle $3.50 a gallon, where we currently are," he said. "At $4 it becomes uncomfortable, but we can probably still weather the storm. At $5 a gallon, we are toast and back in a recession."

Current prices are enough to slow consumer spending, said Ronald Gunderson, a Northern Arizona University economist.

"As the prices go up and up, people will have more thoughts about whether or not they can afford to buy other things," he said.

"To the extent they cut back, it will slow the recovery."

He agreed with Lafakis that current prices are not enough to push the economy back into a recession.

Unfortunately for drivers, prices are likely to go at least another 8 cents or so higher in the next week.

Prices were rising well before the unrest in Libya, and the average retail profit margin in Arizona was minus-1.4 cents before the trouble in Libya, according to AAA Arizona and the Oil Price Information Service.

With retailers losing money on every gallon sold, prices were guaranteed to rise even without the turmoil in the Middle East.

Retailers in Arizona enjoyed a 10-cent average margin on each gallon of fuel in the past year, but that started to slip in December as oil prices rose.

As of last week, the average retailer in Arizona was losing 8.2 cents on every gallon of fuel sold, according to AAA and OPIS.

"They can't do that," AAA Arizona spokeswoman Linda Gorman said. "Unfortunately, that illustrates that retailers have a little catching up to do (with the price of oil)."

Competition sometimes prevents station owners from raising retail prices as fast as costs are rising.

It takes about 10 days before the price of oil is reflected at the pumps, Gorman said.

Oil closed at about $105 a barrel Monday on the New York Mercantile Exchange, up by another $1, meaning drivers are guaranteed to see gas prices continuing to rise.

"I cut back on groceries and I eat out less," said Liban Dabasso on Monday as he topped off his Nissan at the QuikTrip on 27th and Northern avenues, which was among the least expensive stations in town with regular fuel selling for $3.30 a gallon.

"Where else can I cut? I don't know, man, I'm confused right now," said Dabasso, who is an independent contractor for a transportation company. "If it goes higher, maybe I'll look for another job."

Consumers barely feel the benefits of economic recovery as it is, making it difficult to make adjustments for fuel prices.

"The last few years I haven't had any extra money to do anything with anyways," said Mike Schmidt, 51, of Glendale. "There's nowhere to cut back."

In response to the price spikes, the White House is considering tapping into the strategic oil reserve, President Barack Obama's chief of staff said over the weekend.

The government started to stockpile oil after the 1973 Arab embargo.

The Strategic Petroleum Reserve, located in massive underground salt deposits in Texas and Louisiana, currently holds 727 million barrels, enough oil to supply the nation for 37 days.

Releasing additional supplies and ramping up production could temporarily cool off overheated energy markets, but experts warned that it also would put a tighter squeeze on the world's oil as the global economy recovers and consumption rises.

Rising gas prices concern Kylie Freeland, 22, of Avondale. “I've definitely cut back on what I spend on food, and we used to just drive out to Mesa for fun,” Freeland said. “I guess I just won't be driving as much.”